Forgive me if this sounds like blasphemy. But for the sake of so many peoples' mental health, Bay Street should banish its beloved league tables.
For anyone who isn't well versed in the art of deal-making, league tables are the annual rankings of investment banks and corporate law firms compiled by market data specialists such as Thomson Reuters and Bloomberg. They are one of Bay Street's most-watched measures of success.
Whenever a deal closes, the lead advisers are allocated a portion of the transaction's value – the top two underwriters for a deal worth $1-billion, for instance, get credit for $500-million each. At year-end, each adviser's deal values are summed, and those with the highest totals are said to "win" the tables.
One of the core problems, though, is that tables are far too subjective – the methodology has gaping holes that make the rankings easy to game. Every December, untold amounts of anxiety ripple through Bay Street as each adviser covertly argues with the data firms and media outlets in favour of the methodology that makes themselves look best.
Because we print the tables, journalists brace themselves for an annual onslaught. And it can be a bloodsport. A law firm once jokingly sent a colleague of mine a hard hat to serve as protection from the barrage of inquiries.
I've also been on the other side and I've seen the stress these tables create up close. During my brief stint on Bay Street, a managing director I worked with would call the latest league tables up on his Bloomberg terminal on slow afternoons and stare at them for a good 15 minutes straight, as if he was looking at the Matrix.
When gaming the system, the first rule is to play with your footnotes. The next time you see an adviser boast about its ranking in a presentation, make sure to read the fine print. I can almost guarantee there will be multiple footnotes that clarify the criteria at the bottom of the PowerPoint slide.
Because no matter where the firm ranks in total deal flow, the poor analyst or associate tasked with putting together the slide deck will miraculously find a way to make sure his or her firm comes first. Maybe the firm ranked sixth in overall deal value, but first in total number of deals. Never mind that the majority of its deals were tiny – a No. 1 ranking is a No. 1 ranking.
Then there's the issue of lead mandates. In many annual tables, only the "lead," or top, advisers share the credit for a deal. But big deals are usually spread across a number of underwriters who collectively share the risk. Investment banks can earn big fees for being second- or third-tier underwriters in scores of deals, but they rarely get credit in the rankings.
And the poor corporate bankers. They also get shafted. Ask an adviser why they were named the lead underwriter in a big deal, and the investment bankers will likely take credit for their relationship with the issuer or the expertise they provide. The truth, though, is that many dealers win mandates simply because they lend money to the issuer – something the corporate bankers control.
Some recent offerings lay this out clearly. Read through the prospectuses for both Bombardier Inc.'s large offering and the coming Cara Operations Ltd. IPO, and you'll see the lead underwriters are those who lent money to the respective issuers.
In some ways, the annual gamesmanship is just part of life on Bay Street. From afar, it can seem pretty benign. But there's a deeper issue.
Forget the quibbles about "lead" dealers and lending relationships for a second. Where league tables really distort the truth is with major acquisitions that are ultimately written down, or off. Scores of mining deals, both before and after the crisis, propelled advisers to the top of the rankings, but years later many of these deals created impairment charges worth billions of dollars after the market turned south.
You would think that the affected advisers would be humble about their roles in such deals. Yet I've sat through recent meetings where the affected underwriters boasted about winning the tables during the resource bull years.
Look, no awards system is perfect. Everyone knows the Oscars and Grammys are deeply flawed, for example.
But that doesn't mean Bay Street's system can't be improved. If banishing the tables is too much to stomach, let's start with something small. For the sake of your analysts and associates: no more footnotes.